12th March 2010

Daily outlook

Sterling rose on Thursday after a slight improvement in inflation expectations, though analysts still expect economic and political concerns to keep the pound under pressure ahead of an upcoming general election. A survey from the Bank of England yesterday showed expectations for inflation over the next 12 months rose slightly, which helped underpin sterling, albeit temporarily.

Meanwhile, the dollar fell against the yen and euro on Thursday after the U.S. trade deficit for January came in narrower than expected as a result of weak exports and sharply weaker imports. Nevertheless, according to Standard & Poor’s the US dollar is still the most important world currency, however, they warned that rising levels of US debt and dependence on overseas investment for finance pose risks to the currency’s primacy.

Today sees little significant announcements from the UK. From the eurozone we have the industrial figures for January with the expectations on a 0.70% increase on month. Still, today’s highlight will be the retail sales figures from the States that are due out this afternoon, expectation are for slightly negative number, but there could be a surprise to the upside.

  • Euro Zone
    Industrial Production
    German Wholesale Price Index
  • United States
    Retail Sales
    University of Michigan
    Business Inventories
  • Canada
    Unemployment

Currencies outlook

Sterling

The pound steadied above recent week lows against both the greenback and the yen on Thursday, receiving a boost in the late session yesterday from a bout of profit taking on its recent losses. The Bank of England’s survey that pointed to a modest pick up in inflation sentiment over the coming year, also aided sterling’s modest growths. The four times a year survey by the BoE showed that inflation expectations over the coming 12 months rose to 2.5% from 2.4%. Well above the targeted level of 2%. An increase in UK price pressures would limit the scope of easing measures at the central banks disposal. Today is very quiet in terms of data due for release in the UK, so any movement in the pound will be driven by markets elsewhere. However, BoE’s Dale is scheduled to speak at a university, but chances are very slim that any comments will have anything more than a temporary impact, if any.

US Dollar

The dollar lost ground against the yen and euro on Thursday after the US trade deficit for January came in narrower than expected, with the balance suggesting more net exports in the first quarter than previously forecast. The data showed the US trade deficit shrank to £37.29 billion in January from a revised $39.9 billion in December, against the expectations of a $41 billion for the month. A Separate report showed that the number of US workers filing new applications for unemployment insurance fell slightly less than expected last week, hinting a low labour market recovery. Looking forward today, retail sales are expected to come in slightly negative, but could surprise to the upside. An upside surprise is not likely to be strong enough to see the Federal Reserve Bank get rid of its ‘extend period’ phrase, which is going to be next weeks main focus.

Euro

This morning the single currency continues to find support from a slightly weaker greenback. A quick jump in yesterday’s session was spurred by talk of Russian intervention creating demand for the euro. However, ‘the Greek’ story continues to take the centre stage with rumours yesterday that Greece would have to issue bonds again soon. Whilst more issuance is inevitable, such a quick issue after last weeks might not be as well received and could weigh on risk appetite. On the brighter side the eurozone Industrial output for January which is due for release today, is expected to rise by 0.7% on the month or a fall of 1.9% on the year. Still, a downside might surprise markets after Germany released a strong output figure earlier in the week for the same month.

Japanese Yen

The yen dipped overnight in Thursday’s trading, dented by speculation that the Bank of Japan could further relax its monetary policy in the near term. Investors increasingly expect the Japanese Central Bank to further ease monetary policy at its meeting on 16th – 17th March. Government pressure on the BoJ for further easing to support Japan’s fragile economic recovery is simmering, with Finance Minister Naoto Kan saying he hopes the BoJ will help beat deflation. Sources familiar with the central bank’s thinking claim it is considering expanding special money market operations, and analysts say the policy moves may be guided by a desire to weaken the yen.